Michael Keaveney: It's January and the investment world is busy with outlooks and forecasts. But be warned. Many such forecasts are tainted by the sentiment of the moment, which can change and make the prediction look wildly off-base in hindsight.
Take these stark examples from the European Central Bank at either ends of the Global Financial Crisis. In 2007, the outlook was fairly rosy and turned out very wrong. And in early 2009, the outlook was quite skittish and also very wrong. It's a near-impossible task to predict the exact timing of the end of a bull market. But by previous standards, the current successful run of major equity markets and especially that of the U.S. is looking long in the tooth.
Here, we compare previous extended periods of strong returns in U.S. equity markets back to the 1960s. The current market is a clear outlier in terms of both how long it has lasted and the level of gains. We should also note that when the party ended in prior times, the subsequent drop was both relatively quick and severe, typically 30% to 50% from previous highs.
Another point to observe is that in the wake of the runup in U.S. equity markets, the level of returns has run far ahead of gains in measures of the real economy, such as inflation and GDP, creating an economic disconnect.
While most equity markets have enjoyed significant gains since the Global Financial Crisis, gains in the U.S. have stood out against the rest of the world. The left side of this graphic shows the continuous and steady underperformance since 2010 of global equity markets outside the U.S. versus the U.S. But not every U.S. stock has risen by the same amount. Over the period, U.S. value stocks have not had the same runup as growth stocks, particularly since 2017. Value strategies and value investors, in general, have had comparatively anemic performance versus growth stocks for quite a while after a relative rally around 2016.
Looking more globally, the normalized price-earnings ratios of emerging markets and European equity markets are less elevated than the U.S., suggesting that there may be more attractive opportunities from a valuation perspective in those markets.
So, after many years of a bull market in equity markets in general and specifically the U.S., we believe that it is prudent to be defensively positioned and veering towards markets and sectors that have more reasonable valuations and away from more recent winners whose current success may be running ahead of fundamentals.
From Morningstar Investment Management, I'm Michael Keaveney.
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